After one year with a 10% interest rate on debt, what is the net income impact on the Income Statement due to depreciation?

To understand the impact of depreciation on net income in this scenario, it's essential to recognize how depreciation is treated in accounting. Depreciation is a method of allocating the cost of tangible assets over their useful lives, and it is recognized as an expense on the Income Statement.

For this question, assuming that the company has a $100 asset that is depreciated over a set period, if we consider common depreciation methods, such as straight-line depreciation, and assess its impact alongside the interest expense resulting from debt:

1. The 10% interest rate indicates that on a $100 debt, the interest expense for the year would be $10.

2. If depreciation related to the asset is $12 per year, this expense will reduce the taxable income.

3. Net income is affected after all expenses are deducted from revenue. Therefore, if the depreciation expense of $12 exceeds the interest expense and other costs, the overall impact on net income would be a decrease.

In this case, subtracting the depreciation expense results in net income decreasing by $12, reflecting how an increased expense directly impacts profitability. Thus, the correct conclusion aligns with the calculated decrease in net income due to the stated depreciation charge, making it a comprehensive view of the effect of such accounting